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FDIC proposal would broaden overdraft rules reach
WASHINGTON (10/12/10)--The Federal Deposit Insurance Corp. (FDIC) recently proposed rules that would make state-chartered banks under its jurisdiction go farther in incorporating consumer protections in their overdraft programs than the Federal Reserve’s rules dictate. The Credit Union National Association (CUNA) notes that credit unions may well want to monitor what the FDIC is proposing as new overdraft rules, even though those rules would not apply to them. The FDIC actions possibly could foreshadow decisions about overdraft plans made by the new Consumer Financial Protection Bureau (CFPB), and bureau rules would apply to credit unions. Regarding the current situation, this is where things stand. In July, Fed rules went into effect that require accountholders to provide “opt in” consent before a bank or credit union can charge fees for covering overdrafts triggered by ATM withdrawals or one-time debit transactions. The Fed rule does not cover check or ACH payments. The FDIC’s expectations, as outlined in a Financial Institutions Letter (FIL-47-2010) dated Aug. 11, are that institutions monitor their overdraft programs closely and oversee any overdraft payment programs they offer to consumers. (See resource link below.) “Such oversight should include appropriate measures to mitigate risks, incorporating the best practices outlined (in a 2005 Joint Guidance on Overdraft Protection Programs) and effective management of third-party arrangementsm" according to the FDIC. Bank examiners would use this guidance to evaluate the adequacy of a bank’s overdraft program. The FDIC plan proposes that banks that rely on automated overdraft payment programs must establish procedures to address overdrafts triggered by checks and ACH transfers. The FDIC would require banks using automated systems to specifically provide an “opt out” program for checks and ACH payments and monitor accounts to limit overdraft usage by a customer, including giving customers who overdraw their accounts on more than six occasions during a 12-month period less costly alternatives or eliminate overdraft protection on the account, and cap the amount of transactions subject to an overdraft fee or putting a dollar daily limit on overdraft fees. A number of the FDIC's proposed restrictions are drawn from bills in Congress to restrict overdraft programs. Community bankers are “up in arms” about the FDIC plan, according to the Oct. 5 American Banker. The bankers argue that it would be burdensome, restrictive, and would put smaller institutions at a competitive disadvantage to larger ones. The FDIC position is that a bank's "oversight should include appropriate measures to mitigate risks, incorporating the best practices outlined (in a 2005 Joint Guidance on Overdraft Protection Programs) and effective management of third-party arrangements." Management should be especially vigilant with respect to product over-use that may harm consumers, rather than providing them the protection against occasional errors or funds shortfalls for which the programs were intended, according to the agency. A recent event that helps to drive home these points is framed in an announcement issued Friday by the Office of the Comptroller of the Currency (OCC). Under a settlement with that federal regulator, Woodforest National Bank, The Woodlands, Texas, must pay approximately $32 million to consumers in reimbursements from the bank’s overdraft program. The settlement also requires the bank to pay a civil money penalty of $1 million to the U.S. Treasury Department. The OCC determined that Woodforest engaged in “unfair or deceptive practices,” such as charging excessive fees, improperly assessing recurring fees, and assessing “continuous overdraft fees” against certain bank customers. In addition to the customer reimbursement and penalty payment, the bank also agreed to change its overdraft program in order to correct any violations of law.
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